Compound Interest is financial compound that can be useful to increase your assets (savings and investments) exponentially in a short period time. If you are not a financial expert, the understanding of the math that lies behind compound interest can be extremely challenging. That`s the place where a compound interest calculator could be very helpful. In the following article we give our best to explain what compound interest is, how it works and why compound interest calculator, that is part from The Percentage Calculator is a valuable tool. We will provide some hints on how to choose the best compound interest calculator for your specific needs and we will try to answer some frequently asked questions.
Compound interest – what is that?
Compound interest is interest that`s estimated on the initial principal amount and the accumulated interest from previous periods. In simple words the earned amount is reinvested to gain more interest. So your assets grow at an accelerated rate over time.
Explaining the issue an example is following: You deposit $10,000 into a saving account with an annual interest rate of 5%. One year later, the interest earned is $500, bringing you a total balance of $10,500. In the second year, there is 5% interest rate on $10,500, which equals $525 and a total sum of $11,025. In case you don`t withdraw your deposit, the balance will continue its growth at an exponential rate.
Calculate compound interest
Compound interest functions through multiplying the initial amount by the interest rate and the number of interest periods. Below you can see the formula for calculating the compound interest:
Where:
A = the total amount of savings or investment at the end of the term
P = the principal amount
r = the annual interest rate
n = the number of times interest is compounded per year
t = the number of years
The more often interest is compounded, the faster your assets will grow. If, for example, the interest is compounded monthly instead of annually, your profit will be greater as you will earn interest on a more frequent basis.
Why use a compound interest calculator app?
You will easily visualise the effect of compound interest on the amount of your money over time. You can see how much money you will earn for a given period of time by entering the initial deposit, interest rate, compounding frequency and the duration in time. The compound interest calculator helps you choose among different saving and investment options in order to compare the benefit and make an informed selection.
FAQ
What’s the difference between simple interest and compound interest?
Simple interest is calculated only on the principal amount.